Attractive yields in an uncrowded space Imre Tajti, For Professional Investors only Not for public distribution

Transcription

1 Frontier Markets Attractive yields in an uncrowded space October 2014 Imre Tajti, Investment Manager, Emerging Market Debt Aberdeen Asset Management For Professional Investors only Not for public distribution

2 What are frontier markets? Typical Frontier countries: Smaller developing economies with favourable growth dynamics moderate debt levels but twin deficits too Low income countries, with poor governance and limited information Dependent on international aid Frontier markets: Underdeveloped capital markets Under researched Offer higher yields compared to mainstream EM countries with less correlation to US interest rates 1

3 EM countries will continue to be the main drivers of future growth f Others 9% Africa 4% Japan 6% Developing Asia 29% North America 11% Japan 2% Others 9% Africa 12% North America 21% Latin America 8% Latin America 9% Europe 22% Europe 9% Developing Asia 49% Source: Citi, Aug 12 GDP measured in 2010 PPP USD With a growing, financially independent, aspirational middle class 2

4 Africa and frontier countries have very strong growth prospects Spain and Portugal 6 of the world s 10 fastest growing economies of the past decade are in Sub-Saharan Africa Switzerland Belgium and Netherlands China India Italy 24 of the 25 fastest growth stories are Frontier countries Japan Eastern Europe France Germany United States United Kingdom Source: 3

5 São Tomé and Príncipe South Sudan Bhutan Guinea Sierra Leone Libya Turkmenistan Timor-Leste Mauritania Dem. Republic of the Congo Mongolia Mozambique Liberia Lao P.D.R. Côte d'ivoire Cambodia Iraq Papua New Guinea Ethiopia Gabon China Rwanda Myanmar Tanzania Nigeria Frontiers offer strong growth prospects World's fastest growing economies over the next five years GDP growth, %, Accessible markets Source: IMF, Oct 13 Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially For illustrative purposes only 4

6 Investment: Driver of growth Investment rising but still low % GDP Developing Asia SSA MENA LatAm Net FDI inflows to SSA, USD billion Source: IMF, DB Research, Jul 13 For illustrative purposes only Source: UNCTAD, World Bank, DB Research, Jul 13 For illustrative purposes only 5

7 General improvement in public finances Gross government debt, % GDP Developing Asia SSA MENA LatAm Advanced economics Net external debt, % GDP Developing Asia SSA MENA LatAm Source: IMF, Jul 13 For illustrative purposes only 6

8 Demographic dividends Structural drivers of Frontier growth the demographic dividend Million people 2,000 1,800 1,600 1,400 1,200 1, SSA more than 1bn people by in 5 people on the planet will be African by 2050 Source: OEC, United Nations, Jun 13 For illustrative purposes only Africa has the demographic advantage working age population (% of total) Asia Europe Latin America USA % of population is under 25 Lowest median age of any region at 18.6 Strong consumption growth Sub Saharan Africa 7

9 JP Morgan NEXGEM index the only one Country weights (%) Argentina Sri Lanka El Salvador Dom Republic Pakistan Ivory Coast Ecuador Iraq Jamaica Kenya Vietnam Zambia Mongolia Gabon Nigeria Paraguay Egypt Ghana Guatemala Georgia Senegal Honduras Angola Bolivia Mozambique Belarus Jordan Armenia Tanzania Belize It is the smaller, less liquid segment of the main hard currency index 1 : A pure US dollar index Launched in Sep countries Represents 18% of the main index with a market cap. of $66.4bn Only includes those countries that weigh < 2% in the main index Has a high concentration in a few countries Countries have to be sub investment grade Source: JP Morgan, 31 Aug JP Morgan EMBI Global Diversified Index Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index. For illustrative purposes only 8

10 Frontier market bond yields are higher than core EM Market capitalisation $bn 1,200 1, $1,076bn Yields (%) EM Local Currency Sovereign 6.53 EM Hard Currency Sovereign 5.09 EM Hard Currency Corporate 5.06 Frontier Market Sovereign $370bn $300bn 200 $66bn 0 EM Local Currency Sovereign EM Hard Currency Sovereign EM Hard Currency Corporate Frontier Market Sovereign Source: JP Morgan, 31 Aug 14 EM Local Currency Sovereign = JPM GBI-EM Global Diversified, EM Hard Currency = JPM EMBI Global Diversified, EM Hard Currency Corporates = JPM CEMBI Broad Diversified, Frontier Markets = JPM NEXGEM Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index. For illustrative purposes only 9

11 Frontier markets increasing in size and scope Latam / Caribbean Africa Europe / Asia Argentina Angola Armenia Belize Congo Azerbaijan Bolivia Cote D'Ivoire Bangladesh Costa Rica Egypt Belarus Dominican Republic Ethiopia Georgia Ecuador Gabon Iraq El Salvador Ghana Jordan Guatemala Kenya Lebanon* Honduras Morocco Mongolia Jamaica Mozambique Fiji Paraguay Namibia Pakistan Uruguay* Nigeria Serbia* Rwanda Senegal Seychelles Tanzania Uganda Zambia Sri Lanka Vietnam Frontier Bond Market Capitalisation Hard currency Sovereign $159.5 bn Corporates $36.6 bn Local currency Sovereign $438.5 bn Quasi/corporates $82.0 bn Total Frontier Debt $716 bn Total EM Debt $15.63 tln Source: ING, BIS Oct 13 * Local market Frontier markets represent 5% of the EM market 10

12 Frontier markets offer compelling real yields Country 10 year bond yield (%) Inflation y-o-y (%) Real yield (%) Credit rating (S&P)* Uganda B Serbia BB- Dominican Republic B+ Kenya B+ Ghana B Egypt B- Sri Lanka B+ Nigeria BB- Vietnam BB- Source: S&P Local Currency Debt Rating, Bloomberg, 30 Sep 14 *Standard & Poor s credit ratings are expressed as letter grades that range from AAA to D to communicate the agency s opinion of relative level of credit risk. Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The investment grade category is a rating from AAA to BBB- Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index. For illustrative purposes only 11

13 Frontier markets have produced solid risk-adjusted returns 10 years benchmark risk and returns Benchmark annualised returns USD (%) EM Frontier EM HC Sovereign US HY EM LC Sovereign EM Corporate EM Equities US IG Corporate US Treasury DM Equities Annualised volatility (%) Source: Bloomberg, Aberdeen Asset Management, 31 Jul 14 Benchmarks used: US Treasury = JPM GBI US, US IG Corporate = JPM JULI, EM Corporate = JPM CEMBI Broad, US High Yield = JPM US HY, EM HC Sovereign = EMBIG, EM LC Sovereign = GBI-EM GD, EM Frontier = JPM NEXGEM, DM Equities = MSCI World, EM Equities = MSCI EM 12

14 Low correlation to US Treasuries NEXGEM vs US 10yr Treasury Yield (120 day moving correlation) Source: JP Morgan, Citigroup, Aug 14 Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index. For illustrative purposes only 13

15 Ivory Coast: From default to success story Ivory Coast % bonds (price) Launched a new 10 year Eurobond priced at 5.625% Missed coupon payment due to political crisis Reduced overweight position after gains of c.90% in Coupon payments resume Aug 10 Feb 11 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Source: Bloomberg, Sep 14 Increased position as political crisis reached climax Initiated a position in Ivory Coast Brady bonds in Q Exchanged Brady bonds for Ivory Coast 2032 Eurobonds in April

16 Mongolia: Through Rio Tinto glasses Trade balance ,000-1,500-2,000 Chinese Copper Demand from Mongolia (tonnes) Trade Balance (12 month rolling US$mn) 620, , , , , , , , ,000-2,500 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar ,000 The country s external balances came under stress in 2013 but have begun to readjust as copper exports have been boosted by phase 1 of Rio Tinto s Oyu Tolgoi mine coming on-stream Import demand has also collapsed, helped by FDI-related imports falling and the currency depreciating to a more sustainable level The major challenge in recent months has been the on-going dispute between the government and Rio Tinto on the more lucrative second phase of the Oyu Tolgoi mine. This is expected to be resolved given the importance of the project to both parties Source: Bloomberg, 31 May 14. For illustrative purposes only 15

17 Rwanda: 20 years on Economic Growth Business Environment Indices ( ) Opportunity Robust economic growth averaging nearly 8% with a sharp rise in the contribution from services, from 37% in 2001 to 53% in 2012 Business led reforms has resulted better key country rankings compared to near neighbours which have remained stable or worsened Government capital spending is set to rise; with a focus on infrastructure (including road construction, power generation, education and health) Flexible monetary policy has allowed inflation to remain contained at an average of under 5% since 2010 Risks GDP Growth (% YoY) Source: World Bank, Apr 14 GDP/capita (US$) (RHS) Fiscal and current account deficits need to be financed Corruption Perceptions Index 1 Ease of Doing Business Index 2 Donor support represents 38% of revenues while this is expected to continue over the medium-term, it is not guaranteed Index of Economic Freedom 3 Rwanda 49 (102) 32 (148) 65 (116) Kenya 136 (147) 129 (78) 111 (82) Tanzania 111 (102) 145 (124) 106 (97) Uganda 140 (126) 132 (107) 91 (52) DR Congo 154 (171) 183 (181) 172 (-) Source: 1) Transparency International, Dec 13; 2) World Bank, Dec 13; 3) Heritage Foundation, Dec 13 16

18 It s a Ghana! Twin deficits: Twice the fun? Budget Balance (%GDP) Current Account (%GDP) Source: IMF World Economic Outlook, Apr 14. For illustrative purposes only Distressed Assets Ghanaian Cedi (LHS) Ghana 3 Month Treasury Bill Yield (%) BoG Policy Rate (%) 1.5 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Source: Bloomberg, 25 Jun 14. For illustrative purposes only Ghana s large twin deficits (both fiscal and current accounts) has left the country having high financing needs and vulnerable to a deterioration of external conditions While the IMF are expecting both balances to improve over the medium-term, the government has lost market support amid an inability to control fiscal spending. An IMF bailout package is likely given falling international reserves which are now worth less than three months of imports The Ghanaian cedi has borne the brunt of the weak policy environment, depreciating by 68% since 2013 as both local and foreign investors have fled the country The central bank has hiked its policy interest rate to 18% in an effort to keep investments onshore, which has resulted in punitive debt service costs for a government already under stress 17

19 Argentina: sustainable debt, but US legal ruling has resulted in high yields Argentina external debt (non financial public sector and central bank, % GDP) 120% 100% 80% 60% 40% 20% 0% Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Local law US dollar bonds offer high yields, reflecting uncertainty on servicing of NY law bonds Legal ruling on NY law bonds will not impede Argentina s ability to service local law bonds Sustainable debt level and strong ability to pay supportive for local law bonds Source: Bloomberg, Aug 14 18

20 Uruguay: Inflation set to remain high CPI, Inflation expectations % 12 Uruguay CPI (%yoy) Uruguay Inflation Expectations (%yoy) CB Target Lower Band CB Target Upper Band Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Political risks: Frente Amplio, the ruling coalition, has an overwhelming 74% popularity rating Structural reform: incentive programmes have led to Uruguay becoming the 2nd largest beef exporter to China Monetary policy: with inflation currently at 9.08%, CPI is likely to remain above the target range Fiscal policy: deficit stands at -2.1% of GDP, unlike most of Latin America overall revenues are a robust 32% of GDP Source: Central Bank and National Institute of Statistics, Jul 14 19

21 Summary Frontier markets offer diversification benefits Under-owned and under-researched asset class Attractive yields but less liquid than mainstream EM Increasing external issuance at a measured pace 20

22 Appendices 21

23 Key positions % NEXGEM Index Portfolio Sovereign/ quasi 1 US$ bonds Sovereign local bonds Corporate local Bonds Currency exposure Argentina Uruguay Nigeria Serbia Kenya Rwanda Source: Aberdeen Asset Management, 1 Sep 14 Positions for the Aberdeen Global Frontier Markets Bond Fund 1. Quasi-sovereign = 100% government-owned Country allocations are subject to change. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index. Diversification does not ensure a profit or protect against a loss in a declining market. Figures may not add due to rounding Benchmark aware not benchmark driven 22

24 Aberdeen Global Frontier Markets Bond Fund Key fund facts, 31 Aug 14 Performance (Gross) % YTD 1 year Annualised 3 years 5 years Launch Fund Benchmark Difference Source: Aberdeen Asset Managers, BPSS, Datastream, USD Benchmark: JP Morgan NEXGEM Performance is gross of fees and does not reflect advisory fees, had such fees been deducted, returns would have been lower. Past performance is not indicative of future results Risk analysis Since inception Tracking error 3.94 Information ratio Sharpe ratio 4.25 Key facts Fund Size US$109 million Launch date 25 Sep 13 Investment Team Emerging Markets Bond Team Benchmark JPM NEXGEM (for illustrative purposes only) Number of holdings 37 % in top ten holdings 45.1% ISIN LU Valoren Ongoing Charge Figure (OCF) 1.79% Share class A1 Inc Fund domicile Luxembourg Performance (Gross) 125 Fund (Gross) JPM NEXGEM Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 The On-going Charge Figure (OCF), as at 31 Aug 14, is the overall cost shown as a percentage of the value of the assets of the Funds. It is made up of the Annual Management Charge (AMC) of 1.50% and other charges. It does not include any initial charges or the cost of buying and selling stocks for the Funds. The OCF can help you compare the annual operating expenses of different Funds 23

25 Aberdeen Global Frontier Markets Bond Fund Risk statistics Fund Benchmark Volatility (%) Value at Risk (1 month, 99% CI) Conditional VaR (CVaR, %) Tracking Error (%) 4.53 Tracking at Risk (%) 6.67 Systematic Specific Market Risk Decomposition (tracking error, %) Beta versus benchmark 0.59 Correlation versus benchmark 0.79 Active VaR (%) 3.00 VaR Ratio (%) 74 Source: Aberdeen Asset Management, 29 Aug 14 Benchmark: JPM NEXGEM Risk statistics are ex-ante and data is based on 180 weeks of observations. Figures are calculated by our APT risk system which models fixed income assets using a constant maturity approach whereby each instrument is mapped to an appropriate yield curve at issuer or sector level 24

26 For Professional investors only Not for public distribution Past performance is not a guide to future returns. The value of investments, and the income from them, can go down as well as up and your clients may get back less than the amount invested. The views expressed in this presentation should not be construed as advice on how to construct a portfolio or whether to buy, retain or sell a particular investment. The information contained in the presentation is for exclusive use by professional customers/eligible counterparties (ECPs) and not the general public. The information is being given only to those persons who have received this document directly from Aberdeen Asset Management (AAM) and must not be acted or relied upon by persons receiving a copy of this document other than directly from AAM. No part of this document may be copied or duplicated in any form or by any means or redistributed without the written consent of AAM. The information contained herein including any expressions of opinion or forecast have been obtained from or is based upon sources believed by us to be reliable but is not guaranteed as to the accuracy or completeness. Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. 25